2009 and 1930 are a match

[Ven]

Hi everyone this is my first post here.

I am a proponent of the theory that the 2007-2009 market matches the 1929-1933 market. I have noticed this since July and for the most part it has allowed me to accurately predict market behavior for the last half of 2009. The theory is as follows...

General theory:

Both are credit collapse depressions and not typical inventory/business cycle recessions. The fault lies in the build-up of the bubble itself. No subsequent effort can prevent the collapse after the bubble gets going, but various efforts can propel the bubble longer and/or higher and make the subsequent collapse even more catastrophic. Examples...the 1920's was a bubble that last for about a 5 year period and was set to end in early 1929. There was a bit of a panic in the bond market in early 1929. The Federal Reserve responded by juicing the market, and the Super Bubble of Summer 1929 followed. The collapse could not be prevented, but Federal Reserve policy made the bubble worse.

Our bubble, believe it or not, did not start in 2003. It started in 1982. The 1980's and 1990s were the larger equivalent of 1924-1929. The markets started going parabolic as early as the mid-1980's. The bubble tried to burst itself several times (Crash of '87, S&L Crisis 1990, Nikkei Crash 1990, Asian Crisis in late 1990's, Long Term Capital 1998) but the government was always there to bailout the system, continuously adding to moral hazard that started in the 1980s and has lasted for more than 2 decades now. We then had the recession in the early 2000's that was the equivalent of early 1929. The Federal Reserve and the U.S. Government then intentionally created the housing bubble as a means of staving off the inevitable collapse, but only made the situation far worse, creating the Super Bubble of the 2000's.

The point I'm trying to make is that the collapse cannot be prevented. It is inevitable from the time the bubble was created in the first place. It is revisionist history and completely false to suggest that easier monetary policy can prevent a deflationary collapse. I have looked through the Wall St. Journal reports of 1930. They show that, contrary to popular belief, the Federal Reseve's monetary policy was extremely lax in 1930 and the big banks all had more than enough excess reserves even as the rally ended and the markets broke to new lows. The banking system was so oversupplied with money that Wall St. banks could not buy up securities and U.S. Treasuries fast enough. Yet the market continued to decline.

Why? Because the shadow banking system disappeared. The 1930 rally was only a technical one, and after the top, the declines continued relentlessly. Sound familiar?

Technical Analysis:

A-wave breakdown came in Sept-Nov 1929 and Oct 2007 - March 2009:

Wave 1 of 3 marked the decline from the top to a mini-panic and in both markets can be labeled as an ABC move. The selling continued to the "orgy of speculation" diplomatic cris during the first week of October 1929 and the Bear Stearns bailout in March 2008. Both times, the government had to step in and calm markets to prevent a total crash. A 50% retrace followed these short term bottoms. Memorable in the Bear Stearns case because it was thought by some that it would be the lone casualty in the credit crunch and that the bailout gave implicit government backing to all financial firms and hence an end to the recession.

Wave 2 of 3 saw the selling resume (again it can be labeled as an ABC move) to panic levels. This is the crash wave. In both instances it started with an "insider's crash" mid/late October 1929 and Summer 2008. A bailout followed both times. In October 1929 the heads of the Wall St. banks and the President of the NYSE personally went onto the floor, pooled together the equivalent of billions of dollars in today's money, and bought up stocks at overpriced value to end a crash. We too were beginning our crash in June and July 2008 when the government started to intervene with bailouts (and hinted at future bailouts) of IndyMac, Fannie and Freddie, Lehman, AIG, Wachovia, Washington Mutual, and others.

In both 1929 and 2008, a crash followed despite the bailout efforts. In 1929 the following week saw the Crash of '29 and despite our bailouts we still witnessed the Crash of 2008. It's important to note that it is a fallacy to suggest the Crash only occurred because Lehman was allowed to fail. Sure, the govt. could have stepped in and saved them if they had wanted to. But then it might have been AIG or GS or Merrill Lynch or any other number of banks that might have been the one. Even if all of them had been bailed out, it would have either been the failure of one on a cash flow basis or eventually the failure of U.S. bonds. At some point, the crash would have occurred no matter what.

After another correction, Wave 3 of 3 (ABC) was capitulation selling in November 1929 and February-March 2009. This was public panic only as the banks and government intentionally drove down prices. If you remember Geithner's speech last February where he essentially announced he had no plan...it was on purpose. If you remember Dodd and others going on talk shows and talking about bank nationalizations and then bank stocks collapsing...it was on purpose. The goal was to intentionally drive down stock prices in order for the banks to buy them up cheap and sell back at a profit. A recapitalization via the public. Both in November 1929 and February-March 2009 the declines went from what would eventually be the 23.6% fibonacci level to the 1929 and March 2009 lows.

It can be confirmed that the drop in share prices last winter was intentional because it is marked by the head of an inverse head and shoulders formation.

Corrective B Wave:

Wave 1 of 3 (ABC) was marked by an aborted head and shoulders formation in both markets. Both markets quickly rallied off the lows back to the 23.6% fibo retrace level, erasing in the intentional drops that preceded. These rallies marked the left shoulder. At that point, massive recapitalization occurred, especially for the banks. Nobody envisioned the kind of rally we've had, the only goal was to get money as quickly as possible and there was massive secondary issuance in May and June. Not so coincidentally corresponding with the Stress Tests, and a similar move happened in late 1929 as banks and businesses recapitalized themselves expecting large losses in 1930.

A correction then put in the right shoulder on the aborted head and shoulders formations in both markets. Both times, the neckline was roughly the 23.6% fibonacci retrace level. Neither time did the market break down, instead explosive earnings rallies followed in January 1930 and July 2009.

Wave 2 of 3 (ABC) is characterized by an explosive earnings based rally that took the market from the 23.6% to the 38.2% fibonacci retrace level in January 1930 and Summer 2009. The explosive rallies were both surprising yet welcomed by the markets, and it is at exactly this point in time that capital market stress began to dissipate considerably. This wave completed when the 38.2% fibo resistance was turned into support.

A correction occurred both times with one last dip down to the 38.2% fibo support. The important thing to note is that the explosive earnings rallies and corrections really formed the left shoulder on a MUCH more massive head and shoulders formation. Left shoulders are bubbles, and the ones formed in early 1930 and Summer 2009 were both the result of easy Fed monetary policy.

Wave 3 of 3 (ABC) puts in the head on the MUCH more massive head and shoulders formation. It is a distribution rally from the 38.2% to the 50% fibonacci retrace levels. This happened in March-April 1930 and started for us in October, with a dip ending in early November, and the last rally to the top since then. In April 1930 the market moved above the 50% resistance but without impetous and the move failed. I am forecasting that the same is occuring for us right now.

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That brings me up to date. It is my belief that we are imminently putting in a top in U.S. equity markets that none of us will see again in our lifetimes. I expect the decline to start in January 2010 and last several years, and although nobody can pick an exact trend change, next week looks like the best candidate.

Although I have a forecast for the remainder of the bear market, I will withhold all of the details for the time being. I will only issue short-term to med-term forecasts (but updated as needed) in this thread and welcome any feedback and discussion and protest if needed!

I will note three general things going forward and then follow up in another post with my upcoming market forecast:

1. The long-term charts on the Dow and S&P 500 are extremely ominous. The DJIA has formed what looks like a MASSIVE head and shoulders pattern going back to 1982. The 1980's and 1990's put in the left shoulder and the 2000's housing bubble marked the distribution and head. In 2007-March 2009 we crashed down off the head and are currently putting in the right shoulder. The chart is extremely ominous. On the SPX, the chart looks like a possible expanding megaphone and would result in a catastropic collapse to near zero if the March 2009 lows are ever breached.

2. The Dow Jones Industrial Avg. will fall to 1,000 or lower in the coming decade, and the S&P 500 will fall to less than 100. The decline will resume in January 2010.

3. Efforts to prevent the coming collapse cannot possibly be successful since the fault is in the bubbles themselves. Government intervention can change markets for a day, or a week, but they can only interrupt long term moves and cannot prevent or change them. The fractal timing of the 1929-1933 and 2007-??? markets doesn't match up because the environments (i.e. conditions and intervention attempts) were different, but the moves themselves almost exactly match because human behavior and therefore market behavior is universal and does not change.

I will add my 2010 predictions in the next post.

[rffrydr]

Germany pays off Versailles Treaty reparations 2010!...yeah, there's a catch:

http://www.dailymail.co.uk/news/article-1315869/Germany-end-World-War-One-reparations-92-years-59m-final-payment.html
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Today is the Tomorrow you worried about Yesterday!

[Ven]

One last thing to mention tonight for the history buffs...

1930 recovery highs came in mid April.

Commodities began crashing in late April and early May 1930.
That was the move off the head. The right shoulder was put in over the next month, before the double-dip plunge in June 1930.

What we saw today was not Euro related, but rather commodity related.
Look at the moves in Aussie Dollar.

[Ven]

Short-sighted viewpoint, IMO.

I'm not foolish enough to say U.S. Treasury auctions are going to fail tomorrow.

But in 5 years? Very possible.

Remember, before this year, Greece could borrow whatever it wanted, too.

The dollar's status has always given it more time, but not indefinite time.

[rffrydr]

For Zimbabwe, what was "the cure"? A dollar economy.
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Today is the Tomorrow you worried about Yesterday!

[Ven]

Diesel,

"what was going on in their heads"...political pressure. Same thing we face now.

Henry, it's true the U.S. has a much greater capacity to grow than Zimbabwe or say, Greece.

What you fail to take into account is the enormous promises in future spending obligations, conservatively estimated at $60 trillion over the next few decades.

At current pace, U.S. debt service will reach 20% of budget later this decade.
That is nowhere close to AAA.

At some point, the mythical vigilantes will turn toward the U.S. bond market and demand the same austerity that is being demanded of the PIIGS.

Now, everyone wants to say it would be easy if Greece could just print money if not for the EU.
That makes no sense.

If Greece were kicked out of the EU, their debt would still be worthless.
Yes, all of THAT debt that is carried by European banks and the ECB.
Worthless.

Printing does not solve the problem for those banks, anything they get from the Greeks would be devalued.
They lose money no matter what.

The only way to save the European credit markets is to bailout Greece or give blanket guarantees on all EU bank debt like the idiots on Cnbc were asking for today.

But the market is saying that is exactly the WRONG thing to do.
It's been saying for weeks that more debt is exactly the opposite of what needs to be done.

Greece is insolvent. The only solution is a debt restructuring.
The only reason it isn't being done is because of the damage it would cause to balance sheets across the EU banking sector, and then the global contagion.

Germany may very well bailout Greece.
But will they bailout Portugal? Then Ireland, Spain, and Italy too?
Who will bailout France and the U.K. and Japan?

At some point someone is going to fail, and that market expectation of a perpetual market-maker to backstop everything will be shattered forever.

The bond markets will continue to erode like dominoes until the bad debt is cleared from financial markets around the globe, similar to what happened in the 1930s.

[diesel]

Vin,

If we think about the Weimar Republic for a moment, the problems for them began long before the hyperinflation, which really went off in 1923. Following World War I the reparations payments required under the Versailles Treaty squeezed the German government so badly that they eventually defaulted. The Treaty was just a bloody-minded pay-back by the victors of the war and brought so much subsequent grief to the World in the 1939-1945 War that you wonder what was going on in their heads.

Anyway, for historians, you will recall that the French and Belgian armies then retaliated after the German default and took over the industrial area of the Ruhr – Germany’s mining and manufacturing heartland. The Germans, in turn, stopped work and production ground to a halt. The Germans kept paying the workers in local currency despite limited production being possible and you can imagine that nominal demand quickly started to rise relative to real output which was grinding to a halt. The crunch came when the export trade stalled and the only way the German Government could keep paying their treaty obligations etc was to keep spending. The inflation followed.

The same problem occurred in Zimbabwe except instead of the French and Belgium armies taking over Zimbabwe's industry, the white farmers were forced off the farms and farm production ground to a halt. The government continued to spend despite a massive supply side contraction and hyperinflation was the result.

None of these are an issue in Europe or the US at the moment....
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All cats are gray in the dark.

[HenryTo]

Frankly, the comparison between the U.S. and Zimbabwe is old - and ridiculous. The latter has no infrastructure, capital stock, patents, arable land, energy resources, and human capital to back up that printing. The former has - and with respect to human capital - isn't accounted for in the Fed's Flow of Funds balance sheet.

[Ven]

Oh yes, I believe they can.

What is the difference between a depressionary deflation and hyperinflation?

Whether or not the govt. prints money.

Say the bond market goes no bid, like in Greece.
Extraordinarily deflationary if they do nothing.

If they print, on the other hand....welcome to Zimbabwe.

Neither situation is good.
Two sides of the same bankrupt coin.

[diesel]

UK, Japan & US are sovereign in their own currencies. They cant go broke other than through an act of madness. The Euro countries on the other hand can............
_________________
All cats are gray in the dark.

[Ven]

Also, don't listen to the charlatans who would make you believe the recent declines are based on govt. incompetence, or financial regulation.

The truth is we have reached debt saturation levels on a global level.
Markets will not return to health until bad debt is cleared.

In 2007-2008, the banks were stuck with the bad debt.
Then risk was merely transferred to sovereign balance sheets.

Bailouts, clash for clunkers, other idiotic keynesian attempts to salvage the economy,
have only pulled forward demand at the expense of sovereign balance sheets.

The markets are now calling the govt.'s of the world on their bluffs.
The developed economies are simply broke, and don't have the ability to spend spend spend.

Greece is just the canary in the coal mine. Soon it will be Spain.
Even the France, the U.K., Japan....and one day the U.S.

Trade now based on the 1930s scenario.

[Ven]

While the timing was off, and I was a bit offside in Feb,
everything is now playing out the same again.

Recent declines match those of late April / early May 1930.

We are coming off the head of our H&S right now.
Very oversold, but still another 1,000 dow points will come off in near future.

Then look for a bounce and consolidation for the medium term.

[Ven]

Elliot Wave International's Bob Prechter in on board with my technical forecast:
http://slopeofhope.com/2010/01/ewi-takes-the-gloves-off.html

Although I think the decline will take longer than he predicts.

[Ven]

The upcoming forecast according to the 1930 charts is as follows:

End of corrective B-wave:

1. A top is imminent, on weak impetous above the 50% fibonacci retrace level, exactly as happened in April 1930.

Start of Primary wave C-1 (takes out the old low and establishes next important bear market low near 123.6% fibonacci level):

Wave 1 of 3:

2. There will be a long term trend change and 15% pullback starting in January 2010. Targets are 956-980 on the S&P and 9,000 or so on the Dow. This matches the 15% pullback in late April and early May 1930. After rallying from 194 to 296 in 5 months, the DJIA fell from 296 to 250 in a matter of 3 weeks.

Our drop should be expected as several of the weak banks have just recently issued new shares. That marks the head of our MUCH bigger head and shoulders distribution, the pullback is the subsequent drop off the head. In order for the banks to complete their next round of recapitalizations, they will plan to buy those shares back cheaper and resell them higher, so naturally one would expect a drop in prices from here. In fact, I would go so far as to say that the banks and govt. are counting on it.

3. The 15% pullback will all come in January or will occur in January-March.

4. Following the pullback, the markets will rally back up to and consolidate for a couple of months around the 38.2% fibonacci retrace levels. That is 1,015 on SPX and 9,400 DJIA. This will put in our right shoulder on the MUCH bigger head and shoulders pattern dating back to July. Timeframe will either be late January-March/April or later in the Spring, depending on when our pullback completes.

This matches with May-June 1930, as the DJIA also rallied up to and consolidated around the 38.2% fibonacci retrace level.

5. The market is oversupplied, and technical selling will result in a break of the neckline on our head and shoulders pattern dating back to July 2009. The neckline is roughly the 38.2% fibonacci retrace level and the same thing happened in June 1930. The January-June 1930 H&S also had its neckline at roughly the 38.2% fibonnaci retrace, and in June 1930 the market crashed back to 1929 panic levels (the higher of two important lows).

In either March/April 2010 or June(ish) 2010 we will see a severe plunge back to Autumn 2008 levels. The markets will break the neckline at 38.2% and plunge right through the 23.6% support, right through the October 2008 lows support, and finally find support at the crash lows of November 2008. Targets are 7,500 on the Dow and 750 on the S&P.

We will then hear about "double dip" ad-naseum but the charts will be telling us that something far worse than a double dip awaits. But, the media and businessmen seemingly have a catch phrase and spin for almost every scenario.

6. Support will come in at Fall 2008 levels, above the March 2009 bear market lows. Bulls will temporarily take over by Spring or Summer 2010 to start corrective wave 2 of 3. I'll post more on that when the time comes.